§
Le
v
er
e
d Firms as Compar
ab
les
§
T
he Unle
v
er
ed Cost of Capital
§
Asset of Unle
v
er
ed Cost of Capital is the expected r
etur
n
r
equir
ed b
y the f
irm’
s in
v
estors to hold the f
irm’
s under
l
ying
assets,
w
hich is the w
eighted a
v
er
ag
e of the firm
’
s equity and
de
bt cos
ts of capital
§
T
he Unle
v
er
ed Cost of Capital
§
Asset or Unle
v
er
ed Cost of Capital
§
Asset or Unle
v
er
ed Beta
UE
D
ED
r=
r
+
r
E+D
E+
D
UE
D
ED
β=
β
+
β
E+D
E+
D
§
T
he Unle
v
er
ed Cost of Capital
§
Some fir
ms maintain lar
g
e cash balances,
w
hich is a r
isk-
fr
ee
asset
§
In such ca
ses,
Net Deb
t is calculated as De
bt minus Cas
h
§
Net De
bt = De
bt –
Excess Ca
sh and Sho
r
t-T
erm In
v
estments
§
Industr
y Asset Betas
§
It is also possib
le to combine estimates of as
set betas f
or
multiple f
irms in the same industr
y or line of b
usiness
§
Doing so will r
educe estimation er
r
or and impr
o
v
e accur
acy
of the estimated beta